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Oil cools eurozone inflation

Jun 14 2012 14:20

Reuters

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Brussels - Eurozone inflation hit a 15-month low in May as fuel and transport costs fell, giving the European Central Bank leeway to cut interest rates, though that alone would do little to revive the region's stuttering economy.

The ECB left rates at 1% last week and its president says the onus is on the region's governments to take concerted action to boost confidence and competitiveness in a region where separate figures on Thursday showed labour costs continued to outpace economic growth.

Many economists expect the ECB to cut borrowing costs in the coming months, and ratesetter Ewald Nowotny said late last week the bank has the ability to ease policy if the economy continues to weaken.

But cutting cost of borrowing for companies would do little to address the eurozone's underlying problems, with banks reluctant to lend, Spanish bond yields spiralling and Greece's future in the eurozone uncertain.

"I think there's quite a high chance of a rate reduction already over the next one or two months, but I think the big question is whether cutting rates has much meaning in the current environment," said Nick Kounis, a senior economist at ABN Amro.

Annual consumer price inflation in the 17 countries sharing the euro was 2.4% in May, EU statistics office Eurostat said on Thursday, dropping from 2.6% in April as world oil prices fell.

"At the moment we are seeing the effects of past oil price rises and indirect tax hikes, but inflation is likely to collapse next year, so the ECB probably does have some room for manoeuvre," Kounis said.

Small mercies

Confidence in the eurozone's economy has evaporated as European leaders struggle to get to grips with the bloc's two-year debt crisis.

"The central actors in this crisis are not in Frankfurt but in Berlin and it is up to governments not central banks to dig the eurozone out of this," Kounis said.

EU leaders will discuss establishing closer fiscal ties at a summit on June 28-29, and a draft statement prepared for them to deliver after they meet underscored the need for banking and budgetary integration.

Jose Manuel Barroso, president of the European Commission, said on Wednesday that the EU executive could make proposals this autumn to integrate supervision of banks.

"These steps are in the right direction, but could take time until they are officially accepted and take effect," BNP Paribas said in a note to clients.

At least EU policymakers no longer have to deal with soaring oil prices on top of all the other economic headaches.

At the start of the year, the price of crude was driven up by almost a fifth by tensions between the West and Iran over its nuclear programme but has began to fall as investors worry about a slowing global economy, dragged down by the eurozone crisis.

Still, the monthly speed at which prices declined was only 0.1% in May, Eurostat said, pointing to some residual price pressures that could slow the fall in inflation towards the ECB's target of just below 2%."

Economists polled by Reuters had expected a 0.2% fall, as the cost of food and alcohol rose 0.2%. Hotel and restaurants also increased prices by 0.2%.

Rising labour costs

ECB policymakers see inflation coming down during the year as the eurozone struggles with record unemployment and weak business morale.

The ECB is pushing the eurozone to reform its economies and recover from the bloc's public debt crisis, and economists say it must increase productivity and competitiveness.

That challenge was evident in hourly labour costs for the first quarter of this year, also released by Eurostat, that rose by 2% compared to the same period a year ago.

The rise was slightly less versus the previous quarter, when labour costs rose 2.8%.

Labour costs rose 2.5% in industry, 1.9% in construction and 1.8% in services over the period.

The eurozone, with the exception of Germany, has given itself generous pay rises over the past decade during the strong economic growth that followed the introduction of the euro.

The cost of labour has increased since 2001 by about 12% in the EU as a whole and by almost 18% in the eurozone, according to Eurostat data.

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